Tax-Saving Strategies Every American Should Know

 

 

Table of Contents

     

    Following are the multiple ways to save tax in US Legally

    1.Commuter Benefits

    Take advantage of commuter benefits offered by your workplace. For 2023, you can spend up to $300 per month tax-free on commuting expenses, leading to a tax deduction of $3,600 per year. This applies to mass transit, ride sharing, parking, and more.

       

        • Mass transit: trains, subways, buses

        • Ride sharing: Uber, Lyft

        • Parking: meters, garages, lots

      By utilizing commuter benefits, you can lower your taxable income and save money on your daily commute expenses.

      2.Retirement Plans

      It is essential to take advantage of retirement plans offered by your workplace. Examples include a 401k or a 403b retirement plan, with the former being offered by for-profit companies, and the latter available for those working for certain governments or non-profit organizations. By contributing to these plans, individuals can reduce their taxable income for the year while also building up their retirement savings. It is important to note that there are additional retirement plans beyond the 401k and 403b, but these are among the most popular options.

      3.HSA: Health Savings Accounts

      An HSA, or Health Savings Account, is designed for individuals with a high deductible Health Plan. By contributing to an HSA, individuals can lower their taxable income, as these contributions are tax-deductible. Funds within an HSA are dedicated to health-related expenses and can be used for qualified medical expenses, allowing individuals to pay for these expenses with pre-tax money. Additionally, the money held in an HSA can be invested, with any earnings and interest being tax-free. This makes an HSA a valuable tool for managing healthcare costs while minimizing tax obligations.

      4.FSA: Flexible Spending Accounts

      A Flexible Spending Account (FSA) allows you to pay for certain health care expenses with pre-tax money. This can include medical expenses such as copayments, deductibles, and some prescription drugs. By contributing to an FSA, individuals can lower their taxable income and save money on their healthcare expenses.

      It’s important to note that there is a “use it or lose it” rule with the FSA. Any leftover money in your FSA by the end of the year may be forfeited unless your company has a rollover option. Therefore, it’s essential to plan your FSA contributions carefully to avoid losing any funds.

      5.Dependent Care FSA

      A Dependent Care Flexible Spending Account (FSA) is designed to help individuals pay for child care expenses with pre-tax money. This can be incredibly beneficial for parents or guardians who need to cover the costs of daycare, nursery, preschool, nannies, babysitters, and more. It’s not just limited to childcare for children; it can also be used for adult dependents who require care.

      By utilizing a Dependent Care FSA, individuals can reduce their taxable income and save money on necessary care expenses for their dependents. It’s an effective way to manage these costs while minimizing tax obligations.

      6.Capital Losses

      Capital losses can be beneficial for tax purposes as they are tax deductions. When it comes to stocks, the 1099-B tax form will account for stock losses. It’s important to report cryptocurrency losses as well, as they can also be used as tax deductions. Make sure to review your 1099-B tax form to ensure that there are no mistakes, especially regarding the purchase and sale prices of stocks. By reporting capital losses, individuals can reduce their taxable income and save money on taxes.

      7.Review Your 1099-B Tax Form

      After a year of stock market activity, you will receive a 1099-B tax form from your brokerage account. This form provides crucial information about your stock transactions, including the purchase and sale prices. It’s essential to review this form carefully to ensure that there are no mistakes. One common mistake to watch out for is missing information, especially in the “purchase price” section. If this information is missing, it may appear as if you bought the stock for $0, leading to erroneous tax calculations. Make sure to check for any obvious errors or missing data that could potentially cost you more in taxes. You can obtain the 1099-B from your brokerage account’s tax section or website. Take the time to review it thoroughly to avoid unnecessary tax payments.

       

      8.Margin Interest

      When managing your investments, it’s important to consider and deduct your margin interest. This expense can be listed on your 1099-B tax form. Unfortunately, many people forget to report this interest because it’s not always featured prominently on the cover page. By deducting your investment interest expense, you can lower your taxable income and save money on taxes. Be sure to locate this information on your tax form and include it in your tax calculations to maximize your savings.

      9.Gambling Losses

      When it comes to gambling, any winnings you receive will be reported to the IRS through a W2G tax form. However, you can offset these winnings by reporting any gambling losses you may have incurred. Whether it’s losses from table games, slots, sports betting, or horse racing, you can use these losses to reduce the overall taxable amount from your gambling winnings. This can be especially beneficial if you’ve won a substantial amount, as it can help lower the tax burden on your gambling income.

      10.529 Plan

      If you want to put away money for education, whether it’s for your child, someone else, or even yourself, you can consider putting money into a 529 plan. While you will not receive a tax deduction with the IRS for funding a 529 plan, you may receive a tax deduction on your State’s income taxes. Some states do not give a tax deduction for 529 plan contributions, but even in those cases, if you have a 529 plan, you can still benefit from tax-free growth.

      11.Minimal Rental Use Rule

      If you rented out your home for 14 days or less, the money that you make will be 100% tax-free. This is called the minimal rental use rule. It’s essential to report this properly to avoid paying unnecessary taxes. Make sure to notify your accountants or look it up to ensure compliance with this rule.

      FAQs

      1. Are commuter benefits applicable to all forms of transportation?

         

          • Yes, commuter benefits cover mass transit, ride-sharing services like Uber or Lyft, and parking expenses such as meters, garages, and parking lots.

        2. What happens if I have leftover funds in my FSA at the end of the year?

           

            • If there are remaining funds in your FSA by the end of the year, they may be forfeited unless your company offers a rollover option. It’s important to plan your FSA contributions carefully to avoid losing any funds.

          3. What type of expenses can be covered by a Dependent Care FSA?

             

              • A Dependent Care FSA can be used to pay for child care expenses, including daycare, nurseries, preschool, nannies, and more. It can also cover adult dependents who require care.

            4. How can I benefit from a 529 plan?

               

                • While you may not receive a tax deduction with the IRS for funding a 529 plan, you may qualify for a tax deduction on your State’s income taxes. Additionally, even in states without a tax deduction, a 529 plan allows for tax-free growth.

              5. What is the Minimal Rental Use Rule?

                 

                  • The minimal rental use rule states that if you rented out your home for 14 days or less, the income you make from it will be 100% tax-free. It’s important to report this properly to avoid paying unnecessary taxes.